Asset Allocation

Asset Allocation

Asset allocation is one of the most basic, but important, aspects of sound investing. Empirical studies have shown that up to 94% of a portfolio’s variability of returns can be explained by strategic asset allocation.

Furthermore, the third year in the presidential election cycle is usually the best year. We have seen solid gains in 2009 and 2010, and most investors are hoping for more of the same in 2011. This makes choosing an appropriate asset allocation even more significant.

Whether you feel you are taking on too much risk or want to slowly gain more exposure to equities, AAII.com’s resources can help you adjust your current portfolio to a more appropriate allocation.

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Asset Allocation Models

The asset allocation area can be found by clicking on Asset Allocation Models on the Quick Links bar at the top of the home page. Here you will find historical return figures and standard deviation for stock, bond and cash benchmarks (Figure 1).

Next, the page shows suggested allocation breakdowns based on three different investor profiles—aggressive, moderate and conservative. You can see what each investor profile has generated over one-, five- and 10-year periods, along with the standard deviation for each time frame (Figure 2).

The suggested allocations are meant to serve only as a guideline. Aggressive investors are generally thought of as being younger and conservative investors are usually older, although specific situations can call for diversions from this general rule. For instance, tenured professors with a steady income and virtually no risk of losing their jobs might be more aggressive with their portfolios than a young entrepreneur selling high-end jewelry.

Finally, the broad asset allocation scenarios offer a clearer picture of each investor profile, showing the stock/bond allocation, risk and growth characteristics, time horizon and suggested transition allocations (Figure 3). You will find information such as what level of income you can expect to generate and how much you can expect to lose in a very bad year as an aggressive, moderate, or conservative investor.

For more guidance on portfolio allocation issues, a box is provided with links to AAII articles on the subject. These articles can help you determine an appropriate allocation during various stages or scenarios.

Asset Allocation Survey

Our Asset Allocation Survey is an online monthly survey that polls AAII members on their current holdings among stocks, stock funds, bonds, bond funds and cash.

Survey results are posted at the beginning of each month, showing the change from the previous month.

A useful feature is the ability to download the monthly survey results from 1987 to the present. This spreadsheet reveals the changes in asset allocation through several market cycles.

The survey results are averages of our members’ responses and should not be seen as an investment guideline. Keep in mind that individual investors have the tendency to be overly optimistic during strong bull markets and overly pessimistic during prolonged bear markets.

You can take the AAII Asset Allocation Survey at www.aaii.com/assetallocationsurvey.